M/S BIHAR STATE CO-OP BANK LIM V. COMMISIONER OF INCOME TAX and AN

MA/225/2002

AI Insights

The case involves M/s Bihar State Co-operative Bank Ltd., which appealed against the judgment of the Income Tax Appellate Tribunal, Patna, concerning the denial of tax exemptions on interest earned from compulsory investments in government securities and income from leased properties. The Tribunal's decision was based on an earlier Supreme Court judgment which was later overruled. The Patna High Court, referencing the correct and current Supreme Court judgment, found in favor of the appellant, granting the claimed tax exemptions.

• Counselvise Citation: [2009] 140 COUNSELVISE.COM (IT) 762595 (HC-PATNA)
• Appeal Type: Others
• Pronouncement Date: 09-09-2009
• Assessment Year: misc
• Other Referred Cases: Madhya Pradesh Co-Operative Bank Ltd. Vs. Additional Commissioner of Income-Tax, Commissioner of Income-Tax Vs. Karnataka State Co-operative Apex Bank, Gujarat State Co-operative Bank Ltd. Vs. Commissioner of Income-Tax, Commissioner of Income-Tax and another Vs. Grain Merchants Co-operative Bank Ltd., Commissioner of Income Tax Vs. Nainital District Co-operative Bank
• Laws Referred To: Income Tax Act, 1961, Bihar & Orissa Co-operative Society Act, 1935, Banking Regulation Act, 1949
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: HARSHWARDHAN PRASAD; ARCHANA SINHA
• Assessee Lawyers: K N JAIN; S K CHOUBEY; MANORANJAN CHOUBEY; R USHA
• Keywords: Co-operative Bank; Income tax exemption; Rental income; Interest on Government Securities; Compulsory Investment
• Section: 56; 80P; 6; 260A; 5; 3; 18; 19; 16

Judgement Text

" MISC. APPEAL No.225 OF 2002 ***** Against the judgment dated 18.1.2002, passed by the Income Tax Appellate Tribunal, Patna Bench, Patna, in ITA No.383/Pat/2001 upholding the order passed the Commissioner of Income Tax (Appeal-II), Patna dated 12.07.2001 in Appeal No.141/P/A-II/2001. ***** M/s Bihar State Co-operative Bank Ltd., a Co-operative Society registered under Bihar & Orissa Co-operative Society Act (Vol. VI 1935) having Head Office at Ashok Raj path, Patna through the Managing Director Shri Anil Kumar Upadhya, I.A.S. .... Assessee- Appellant. Versus 1. The Commissioner of Income-tax, Patna. 2. The Joint Commissioner of Income-tax, Special Range-I, Patna now redesignated as Joint Commissioner of Income- tax, Circle-I, Patna. .... Assessing Officer-Respondents. ***** For the Appellant: Mr. K.N. Jain, Sr. Advocate with Mr. S.K. Choubey, Advocate, Mr. Manoranjan Choubey, Advocate & Dr. (Ms.) R. Usha, Advocate. For the Respondents: Mr. Harshwardhan Prasad, Sr. Standing Counsel with Ms. Archana Sinha, Assistant Standing Counsel. ***** P R E S E N T THE HON'BLE MR. JUSTICE SUDHIR KUMAR KATRIAR THE HON'BLE MR. JUSTICE SHYAM KISHORE SHARMA ***** S K Katriar, J. The assessee has preferred this appeal under the provisions of Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the „Act‟), whereby his claim for exemption from payment of income-tax on the interest earned on the two items in question has concurrently been rejected by the three authorities. It relates to the assessment year 1996-97. 2 2. The basic facts essential for the disposal of the issues before us are not in dispute and may be briefly indicated. The appellant is a Co-operative Society registered under the provisions of the Bihar Co-operative Societies Act, 1935 (Act VI of 1935) (hereinafter referred to as the „Bihar Act‟), and is engaged in the banking business of lending. Certain provisions of the Bihar Act specifically govern banking companies and we shall have the occasion to refer to them in due course. Section 3 of the Banking Regulation Act, 1949 (10 of 1949) (hereinafter referred to as the „Central Act‟), applies to co-operative societies in certain cases, and shall be discussed at the appropriate stage. The appellant submitted its returns for the period in question and was assessed to tax, vide order dated 14.9.2000, passed by the learned Joint Commissioner of Income-Tax, Special Range-I, Patna, whereby he rejected the two claims for exemption, namely, the interest earned by it on its compulsory investment should be exempted from payment of income-tax, and the income received from lease of its immovable properties should also be exempted from payment of income-tax. 3. Aggrieved by the order of the learned Assessing Officer, the appellant preferred appeal which has been rejected by the learned Commissioner of Income Tax (Appeals-II), Patna, by order dated 12.7.2001, passed in ITA No.141/P/A-II/2000- 2001, whereby he has rejected the claims of exemption made by the appellant and upheld the order of the learned Assessing Officer. The appellant challenged the appellate order by 3 preferring appeal before the Income Tax Appellate Tribunal, which was registered as ITA 383/Pat/2001 (The Bihar State Co- operative Bank Limited vs. Joint Commissioner of Income Tax, Patna), whereby the findings of facts recorded by the learned appellate authority were upheld, and the appeal was dismissed. While rejecting the claims, the learned Commissioner of Income Tax relied on the judgment of the Supreme Court in Madhya Pradesh Co-Operative Bank Ltd. Vs. Additional Commissioner of Income-Tax, reported in (1996) 218 ITR 438, and observed that the balance-sheet of the appellant disclosed statutory reserve fund of over rupees three crores, as well as 13 different types of other reserves. It, therefore, rejected the first claim for exemption, and also rejected the claim for exemption from receipts of lease(s). Hence this appeal. 4. The present appeal was admitted by a Division Bench of this Court on 11.10.2006, and the following substantial questions of law have been formulated for adjudication: (1) “Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is justified in holding that rental income of Rs.12,21,698/- from house property does not qualify for deduction u/s 80P of the I.T. Act as banking business income?” (2) “Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is justified in holding that the interest income of Rs.14,23,316/- earned on investment of reserve fund is not derived from regular banking business of the appellant and does not qualify deduction u/s 80P of I.T. Act?” 5. While assailing the validity of the impugned order, learned counsel for the appellant submits that, in view of the 4 provisions of Section 80P(2) (a) (i) of the Act, the interest earned on the reserve funds in various Government security qualify for exemption from payment of taxes. He has also relied on the provisions of sections 18 and 19 of the Bihar Act, and section 56 read with sections 5 and 6 of the Central Act. He next submits that the learned Tribunal has failed to notice the distinction between an ordinary co-operative society, and banking co- operative society which in addition is governed by the Central Act. He next submits that in view of the provisions of sections 6 and 56 of the Central Act, the investment made by the appellant in Government securities is compulsory investment in terms of section 19 of the Bihar Act and is, therefore, a business activity of a banking co-operative society. In view of the relevant provisions of the two enactments, interest earned on such compulsory investment by a banking co-operative society is entitled to exemption. He relies on the judgment of the Supreme Court in Commissioner of Income-Tax Vs. Karnataka State Co-operative Apex Bank, reported in 2001, Vol. 251 ITR 194 (SC). He has also submitted that the learned Commissioner of Income-tax as well as the learned Tribunal have relied on the judgment of the Supreme Court in Madhya Pradesh Co- operative Bank Ltd. Vs. Additional Commissioner of Income- Tax (Supra), which has been overruled by the Supreme Court in Commissioner of Income-Tax Vs. Karnataka State Co- operative Apex Bank (Supra). He lastly submits that the appellant has leased out certain portions of its immovable 5 property which earn certain income. In view of the provision of section 6(l) and 6(n), read with section 6(2) of the Central Act, such income qualifies for exemption from payment of income-tax. He has also relied on the following judgments: (i) Judgment of the Supreme Court in Gujarat State Co- operative Bank Ltd. Vs. Commissioner of Income- Tax, reported in (2001) 251 ITR 522; and (ii) Division Bench judgment of the Karnataka High Court in Commissioner of Income-Tax and another Vs. Grain Merchants Co-operative Bank Ltd., reported in (2004) 267 ITR 742. 6. Ms. Archana Sinha, learned Assistant Standing Counsel for the Department of Income-Tax, has submitted that the exemption with respect to interest as claimed by the appellant is inadmissible if the provisions of the two Acts are read harmoniously. In her submission, it is covered by the following judgments: (i) Division Bench judgment of this Court dated 3.9.2008, in M.A. 350 of 1999 (M/s Bihar Rajya Sahkari Bhoomi Vikas Co-operative Bank Simit vs. Commissioner of Income Tax and others); (ii) Division Bench judgment of High Court of Rajasthan reported in (2009) 176 Taxman 404 (Raj.)= (2009) 221 CTR (Raj) 395 (Commissioner of Income-tax Vs. Sirohi S.B.V. Bank Ltd.); 6 (iii) Division Bench judgment of the High Court of Uttarakhand in Commissioner of Income Tax Vs. Nainital District Co-operative Bank, reported in (2008) 215 Current Tax Reporter (Uttarakhand) 242. She submits that the income derived from rental has been rejected by the learned Tribunal for valid reasons. She lastly submits in the alternative that the matter may be remitted to the learned Commissioner of Income-tax, inter alia, for the reason that the provisions of the Central Act have not been considered by him as well as the learned Tribunal. 7. We have perused the materials on record and considered the submissions of learned counsel for the parties. The admitted position is that the appellant is registered under the Bihar Act and is, therefore, governed by this Act as well as the Central Act. We should first of all notice the relevant provisions of the Bihar Act. Section 16 of the Bihar Act is headed “Restritions on lending”, Section 18 is headed “Reserve Fund”, Section 19 is headed “Investment of fund”, and are reproduced hereinbelow for the facility of quick reference: “16. Restrictions on lending.- (1) Except with the general or special sanction of the Registrar and subject to such restrictions as he may impose, a registered society shall not- (a) make a loan to any person other than a member, or (b) lend money on the security of movable property. 7 “Provided if any reference is received, the Registrar shall dispose off the reference within three months of its receipt.” (2) The State Government may, by general or special order, prohibit or restrict the lending of money or mortgage of immovable property by registered society or class of registered societies. (3) Where the Registrar has accorded sanction to a financing bank under the provisions of sub-section (1), a registered society which is a member of such financing bank may, subject to the terms of the sanction and such other terms and conditions as may be prescribed by the Registrar, act as agent for the financing bank and as such agent carry out, with or without any commission, all or any transactions connected with loans or advances made or to be made by the financing bank. “18. Reserve Fund.—(1) At least thirty-five percent of the net profits of a registered society shall each year be deposited to reserved fund provided that State Government may by rule increase or decrease this proportion for work of any Society or class of Societies. (2) The reserve fund shall not be used in the business of the society except to such extent and in such manner as may be prescribed by the rules. “(3) At least ten percent of the net profit shall be transferred to “Co-operative Education & Development fund” by all the registered societies. (4) In such registered societies where there is State contribution to share capital, at least ten percent of the net profit shall be transferred to an “Equity Redemption Fund” till such time the amount of this fund becomes equal to the share capital. (5) Any portion of the reserve fund not used in the business of the society shall be invested or deposited in one or more of the ways specified in section 19 subject to such rules as the State Government may make in this behalf”. “19. Investment of fund.- Subject to the provision of sub-section (2) of section (16) a registered Society shall invest or deposit its funds- (a) in a Government Saving Bank or (b) in its own financing Bank or 8 (c) in any of the securities specified in section 20 of Indian Trust Act, 1982 (2 of 1982) (d) in securities specified by Reserve Bank of India, or (e) with the general or special sanction of the Registrar and on such conditions as he may impose. (i) In share or securities of any other registered societies. (ii) In any scheduled Bank or with the sanction or Registrar in other registered societies carrying Banking business. (f) may invest or deposit in any other mode permitted by the rules.” It is evident on a close reading of these provisions of the Bihar Act that a banking co-operative society like the appellant is obliged by force of law to invest at least 35% of its reserve fund in various Government securities, as the law then stood. To that extent the funds of the appellant are locked up, and are not in immediate circulation for its lending business, and are indeed by way of security to its investors. 8. We should now notice the relevant provisions of the Central Act. Section 3 of the Central Act is headed “Act to apply to co-operative societies in certain cases”, and is reproduced hereinbelow: “3. Act to apply to co-operative societies in certain cases.- Nothing in this Act shall apply to- (a) a primary agricultural credit society; (b) a co-operative land mortgage bank; and (c) any other co-operative society, except in the manner and to the extent specified in Part V. The admitted position is that the appellant is governed by the provisions of section 3 of the Central Act. Section 5 of the Central Act provides the definition of the expression used in the 9 enactment. Section 5(a) defines “approved securities” and is reproduced hereinbelow: “5 (a). “approved securities” means- (i) securities in which a trustee may invest money under clause (a), clause (b), clause (bb), clause (c) or clause (d) of section 20 of the Indian Trusts Act, 1882 (2 of 1882); (ii) such of the securities authorised by the Central Government under clause (f) of section 20 of the Indian Trusts Act, 1882 (2 of 1882), as may be prescribed”. Section 5(b) defines “banking”. Section 6 is headed “Forms of business in which banking companies may engage”, the relevant portion of which is reproduced hereinbelow: “6. Forms of business in which banking companies may engage.- (1) in addition to the business of banking, a banking company may engage in any one or more the following forms of business, namely:- xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx (l) selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or turning into account or otherwise dealing with all or any part of the property and rights of the company: xxx xxx xxx xxx xxx (n) doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company; (2) No banking company shall engage in any form of business other than those referred to in sub- section (1). (Emphasis added) It is thus evident on a plain reading of section 6 that it puts restrictions about the nature and extent of banking 10 business for which the organizations covered by this Act can engage themselves. Sub-section (l) incorporates “leasing”. Section 56 is headed “Act to apply to co-operative societies subject to modifications”, and takes within its sweep a co- operative bank, clause (d) of which opens with a non-obstante clause as a result of which the provisions of this Act over-ride the bye-laws. 9. The appellant was thus obliged to invest 35% of its reserve funds in Government securities as contemplated by section 19 of the Bihar Act. The question is whether or not interest on such compulsory investment would qualify for exemption from payment of tax. The issue fell for the consideration of the Supreme Court in Madhya Pradesh Co- operative Bank Ltd. Vs. Additional Commissioner of Income- Tax (Supra). A Bench of two Hon‟ble Judges of the Supreme Court held that the same does not qualify for exemption. The learned Commissioner of Income-tax as well as the learned Tribunal have relied on this judgment and rejected the appellant‟s claim for exemption from payment of income-tax from the interest earned on the Government securities. The issue was re-considered by a Bench of three Hon‟ble Judges of the Supreme Court in Commissioner of Income-Tax Vs. Karnataka State Co-operative Apex Bank (supra), which did not agree with the aforesaid judgment of the Supreme Court in Madhya Pradesh Co-operative Bank Ltd. Vs. Additional Commissioner of Income-Tax (supra), and overruled the same in clear terms. 11 The following portion of the later judgment, which holds the field today, is reproduced hereinbelow for the facility of quick reference: “The question is whether we agree with the reasoning in Madhya Pradesh Co-operative Bank Ltd (1996) 218 ITR 438 (SC). There is no doubt, and it is not disputed, that the assessee co-operative bank is required to place a part of its funds with the State Bank or the Reserve Bank of India to enable it to carry on its banking business. This being so, any income derived from funds so placed arises from the business carried on by it and the assessee has not, by reason of section 80P (2) (a) (i), to pay income-tax thereon. The placement of such funds being imperative for the purposes of carrying on the banking business, the income derived therefrom would be income from the assessee‟s business. We are unable to take the view that found favour with the Bench that decided the case of Madhya Pradesh Co-operative Bank Ltd. (1996) 218 ITR 438 (SC) that only income derived from circulating or working capital would fall within section 80P(2)(a)(i). There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital. In the premises, we take the view that the decision of this court in the case of Madhya Pradesh Co-operative Bank Ltd. (1996) 218 ITR 438 (SC) does not set down the correct law and that the law is as we have put it above. The question, accordingly, is answered in the affirmative and in favour of the assessee.” 10. We must state that the order of the learned Commissioner of Income-tax was rendered on 12.7.2001, whereas the judgment of the Supreme Court in Commissioner of Income-Tax Vs. Karnataka State Co-operative Apex Bank (supra), was rendered on 22.8.2001, and, therefore, could not have been noticed. However, the order of the Tribunal was rendered on 18.1. 2002. It appears that the later judgment of the 12 Supreme Court was not brought to its notice and, therefore, it fell in the error of following the earlier judgment of the Supreme Court which stands overruled. According to the later judgment of the Supreme Court, it is clear that the appellant‟s income derived by way of interest on its compulsory deposits in Government securities to the extent of 35 per cent of its reserved deposits does qualify for exemption from payment of income-tax. In view of the authoritative pronouncement of the Supreme Court, we do not feel the necessity of discussing some of the judgments relied on by the learned Standing Counsel which fall foul of the authoritative pronouncement of the Supreme Court. 11. We now take up the second issue raised by the appellant. Learned counsel for the appellant is right in placing reliance on the provisions of section 6(l) of the Central Act. We have noticed hereinabove that section 6 of the Central Act indicates the forms of business in which banking companies may engage. Section 6(l) incorporates „leasing‟ which means that the business of leasing by a banking company is a recognised form of business. Obviously, therefore, the income derived by the appellant from lease of immovable property would be exempt from payment of income-tax. The issue is really covered by a Division Bench judgment of the Karnataka High Court in Commissioner of Income-Tax and another Vs. Grain Merchants Co-operative Bank Ltd. (supra). The judgment of a Division Bench of the Gujarat High Court in Gujarat State Co- operative Bank Ltd. Vs. Commissioner of Income-Tax (supra), 13 also supports the appellant‟s case. The same has been relied on by the Karnataka High Court in the said judgment. 12. In the result, this appeal is allowed, and the order dated 18.1.2002, passed by the Income Tax Appellate Tribunal is hereby set aside. The appellant shall be entitled to exemption from payment of income-tax on the interest derived from its compulsory investment in Government Securities to the extent of 35% of its reserve fund. It is also entitled to exemption from payment of income-tax on the income derived from rental income of its immovable properties. The learned Assessing Officer is directed to revise the demands. The appellant shall be entitled to refund of the amount, if already deposited, along with interest as per the statutory provisions, from the date(s) of deposit(s) till the date of refund. (S K Katriar, J.) Shyam Kishore Sharma, J. I agree. (Shyam Kishore Sharma, J.) Patna High Court, Patna. Dated the 9th day of September, 2009. S.K.Pathak/ (A.F.R.) "